Most Australian REITs can withstand property value declines: Moody’s Investors Service

Australian real estate investment trusts (A-REITS) have good gearing buffers to withstand the looming property value declines, according to a recent report from Moody's Investors Service.

The predicted downturn is due to weak demand and slowing economic activity caused by the coronavirus pandemic.  

The report found that property values would need to fall significantly for A-REITs to breach gearing and covenant thresholds.

“We expect retail property values to decline in the next 12-18 months because of weak demand and economic activity resulting from coronavirus related disruptions,” saidsenior analyst Saranga Ranasinghe.

“Office property values will fall to a lesser degree, and continued demand will support industrial property values.”

The report futher found that average property values would need to fall 34% to breach the top end of the rated REITs' target gearing (debt/asset) ranges and fall 55% to breach their covenant thresholds.

The REITs came into the downturn with balance-sheet buffers to withstand an increase in gearing. 

According to the report retail A-REITs will experience the largest declines in property values.

“In response to coronavirus disruptions, Vicinity Centres (VCX, A2 negative), Shopping Centres Australasia Property Group (SCP, Baa1 stable) and Charter Hall Retail REIT (CQR, Baa1 stable) raised equity to strengthen their balance sheets,” added Ranasinghe.

CQR's gearing will approach covenant thresholds if property values fall more than 25%. Without debt reduction, Scentre Group's (SCG, A2 negative) gearing will breach its rating tolerance levels if property values fall more than 27%.

But SCG's gearing will remain well within its covenant thresholds.

Diversified A-REITs with retail property are also exposed to devaluations; office value declines are likely to be moderate.

Despite exposure to retail, the risk to diversified A-REITs is mitigated by exposure to industrial as well as office properties.

Stockland Group (SGP, A3 stable) has the largest exposure to retail. SGP has significant buffers within its covenants, but it will approach its rating threshold if its retail property values decline more than 30%.

We expect office property values will decline only moderately over the next 12-18 months and do not see material risks to gearing levels of other diversified A-REITs.

Industrial property values supported by e-commerce penetration and increasing focus on supply chains.

Unlike retail and office, we expect industrial property values will be flat to up slightly over the next 12-18 months.

The pandemic has accelerated e-commerce penetration in Australia and increased focus on supply chains.

The report concluded that Goodman Group (GMG, Baa1 stable), Goodman Australia Industrial Partnership (GAIP, Baa1 stable), and Charter Hall Prime Industrial Fund (CPIF, Baa1 stable) will benefit most.